Teva Pharmaceutical Industries has agreed to buy Allergan Plc's
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Allergan's generic business is generally seen as a better fit than Teva's previous target Mylan because it will improve Teva's distribution channels and because Allergan is strong in so-called biosimilar drugs.
Teva's shares jumped 10.6 percent in Tel Aviv after the deal was announced.
At the same time, Teva dropped its $40 billion bid for Mylan, which hit a snag when a Dutch foundation linked to Mylan bought temporary control of half the company in an attempt to block the takeover.
This could raise the likelihood that Mylan will succeed in its bid for Perrigo Co
Teva's deal with Allergan was unanimously approved by the boards of both companies and is expected to close in the first quarter of 2016.
Teva Chief Executive Erez Vigodman said the combined companies will have proforma revenue of $26 billion and earnings before interest, tax, depreciation and amortization of $9.5 billion in 2016.
"Our respective portfolios of generic medicines and applications are highly complementary, providing Teva with high quality growth and earnings visibility, and the scale and resources to expand upon our specialty capabilities," he said.
"This acquisition reinforces our strategy, accelerates growth and diversifies revenues both by product and geographically, supporting our new business model."
Teva said it believes the acquisition will be significantly accretive to adjusted earnings per share, including double-digit accretion in 2016 and more than 20 percent accretion in year two and year three following the close of the deal.
It expects cost synergies and tax savings of $1.4 billion annually by the third anniversary, from efficiencies in operations, manufacturing, and sales and marketing.
It also expects the acquisition to generate free cash flow of $6.5 billion in 2016 and increased free cash flow in subsequent years. This means it will be able to pursue future acquisitions to expand Teva's portfolio in both specialty pharmaceuticals and generics.
(Editing by David Clarke)